India has fallen from investors’ minds over the past few years as attention has focused on the other Asian giants, China and Japan. Expect that to change in the next few weeks as election fever comes to the boil in the world’s largest democracy.
Indians love elections as anyone who has been caught up in a chaotic, noisy pre-election rally can testify. This year’s poll looks like being the most interesting for years because, like Britain in 1979, the country is facing a choice between an incumbent Congress government that sees its role as protecting the poor and a challenger party, the Bharatiya Janata Party or BJP, which wishes to present a more entrepreneurial, Thatcherite face.
Redistribution of wealth over growth
Critics of Manmohan Singh’s ruling coalition say it has prioritised redistribution of wealth over growth. Those policies are seen to have failed, with opinion polls favouring the BJP on a range of questions, from the parties’ ability to help the poor to how well they can control prices.
Stock investors have already placed their vote; the Sensex index has risen to a new all-time high above 22,000, largely on expectations that a new business- and investment- friendly government will be ushered into power in May.
India, along with fellow success story this year Indonesia, has seen positive flows into its stock market for seven consecutive months, in stark contrast to other Asian markets like Thailand and Japan where the money is going the other way.
Under Narendra Modi, the BJP has sought to distance itself from its Hindu-nationalist roots, looking to replace its divisive image with a pitch focused on economic competence that meets the aspirations of the younger generation that will cast the marginal vote this year.
Anyone under the age of 23 was born after the economic reforms of the early 1990s that swept away the old “licence Raj” bureaucracy that had prevailed since Independence. That was India’s Deng Xiaoping moment, the equivalent of the reforms in 1978 that launched China’s economic renaissance.
Comparison with China
The comparison with China is interesting because the two countries have travelled different paths since embracing capitalism. India has looked on enviously at China’s ability to drive through change. With its decentralised, democratic but ultimately inefficient and corrupt political system, India has never looked close to achieving China’s urbanisation and industrialisation miracle.
India’s achievements have not been insignificant – enrolment in tertiary education has jumped from 11 per cent of eligible students in 2004 to 23 per cent today; the numbers living in poverty have fallen dramatically over the same period; nearly half of India’s 250 million households now have TV.
But although its growth rate over the past decade under Congress has averaged 7.7 per cent, it has fallen over that period from nearly 10 per cent to around 5 per cent. As China has also found out recently, the rate of change is just as important as the absolute level. And for India’s many graduates who are unable to find jobs that match their aspirations, the feel-good factor is notably absent as polling day approaches.
So is the stock-market’s optimism justified? On a range of measures, India looks in better shape. Inflation, stubbornly high, has begun to moderate. The current-account deficit, a source of concern and the reason India has been lumped together with the likes of Brazil, South Africa and Turkey in the so-called “fragile five” club of vulnerable emerging economies, is significantly lower. That, in turn, has reversed the rupee’s plunge.
Benefits of rising stock market
A more stable currency means that foreign investors will also enjoy the benefits of a rising Indian stock market. The exchange rate largely wiped out the market gains over the past couple of years.
With the Indian market trading at around its 10-year average of 15 times expected earnings, which themselves are forecast to grow at around 15 per cent, the market does not look expensive even if it is also not particularly cheap.
This all means that the Sensex is likely to be driven by opinion polls over the next few weeks. Foreign investors, in particular, have poured money into India in the hope that May’s election will usher in the kind of economic growth and infrastructure investment seen in Modi’s home state of Gujarat.
There is a lot riding on Modi and sometimes it is better to travel than to arrive in investment. But it does feel like the country is about to emerge from the shadow of its Asian neighbours.
